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Russian Aircraft Industry Seeks Revival Through Merger

MOSCOW, Feb. 21 - When the Russian carrier Aeroflot announces next month which manufacturer will replace part of its aging fleet of long-range passenger jets, a Russian contestant will not even be in the running.

Yet much more than next month's deal is at stake. A fierce battle here between Boeing and its rival, Airbus, is just getting warm, with Airbus talking Tuesday of a long-term cooperation pact worth $25 billion as it jostles to gain the upper hand.

At the same time, Russia is planning an aviation-industry comeback of its own. President Vladimir V. Putin signed a decree on Tuesday creating a huge aviation entity, combining the nation's six major aircraft design and manufacturing companies into a single holding with substantial state control.

And in an acknowledgment of failure, Russia is largely withdrawing from the wide-body passenger jet business, after the Ilyushin 96, which entered service in 1992 as the pride of the domestic passenger fleet, proved unable to compete with Western-made aircraft.

Under Tuesday's decree, Russia will focus on smaller regional passenger jets with 100 seats, as well as military and transport aircraft. That way, analysts say, an industry that was flat on its back in the years after the Soviet Union collapsed may be in position to try a comeback.

"Putin has gone through with it," Elena Sakhnova, a transportation analyst at the United Financial Group, a Moscow brokerage firm, said in a telephone interview. "This is a real important change. The merger removes unnecessary competition and puts design bureaus and production assets under one roof."

With shared engineering and manufacturing skills, and the promise of Kremlin patronage, the new company could make Russian manufacturing a formidable competitor to Western makers, Ms. Sakhnova and other analysts said. The announcement came as Boeing and its European rival Airbus were competing for a contract to sell Aeroflot 22 or 23 planes, worth about $3 billion, for routes from Moscow to North and South America and Asia.

The Russian producer Ilyushin, the world's only other maker of wide-body passenger jets, was excluded from the bidding.

The battle here of the big Western companies became visible early Tuesday, when a representative of Airbus said the company was in talks with Russia for parts and design work that could total $25 billion in the coming decades. A spokesman at Airbus headquarters, however, refused to confirm the remarks.

Boeing and Airbus want both to sell aircraft and to scoop up engineering and design talent that might leave Russian companies after the merger that was just decreed.

Russian officials say the new holding company will have an initial capitalization of $10 billion, and that minority shareholders will be folded into the new company through share swaps. The government already has controlling stakes in all the components.

The merged company, to be called the United Aircraft Corporation, will combine Sukhoi, MIG, Tupolev, Irkut, Ilyushin and Yakovlev under one authority.

"We have a simple goal," said Andrei G. Reus, a Russian deputy minister of energy and industry, in an interview last month. "We are an aviation superpower and we intend to remain one. Nonetheless, we need to make some changes, which we are doing now." Mr. Reus spoke from the sprawling ministry building, a maze of red-carpeted hallways and large oak doors.

Analysts say that the Russian aircraft industry may be ready for a comeback. Its older long-range passenger jets, the IL-86 and IL-96, are rarely used on flights to Western destinations, though they fly extensively within the former Soviet Union.

The IL-86 was aimed at bringing spectators to the 1980 Olympics in Moscow, but did not enter service in time. It is no longer made. The newer IL-96 is banned at some European airports because it falls short of noise standards.

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A decisive and embarrassing moment for the IL-96 program occurred last summer, when a particularly prominent IL-96, the presidential plane, broke down on a visit to Finland. The aircraft remained on the tarmac because of a brake problem while Mr. Putin flew home in a smaller plane. The president of Ilyushin was fired.

Usually, demands on the industry are less pointed. "We need to find a niche," said Yuri M. Koptev, the deputy industry minister in charge of aviation and a former director of Russia's space program, in an interview late last month. "Just as Boeing doesn't make a regional jet, we are also determining a direction for Russian aviation to become a world leader."

The merger will allow Russia to concentrate on a new Russian Regional Jet, or RRJ, that it hopes it can sell in Europe and the United States for short-range flights. Boeing is an adviser on the project.

Boeing estimates the wide-body jet market in Russia and other former Soviet republics at around 130 aircraft over the next 20 years. At list prices, they would be worth more than $19 billion today.

With the Aeroflot sale pending, the two Western companies have been emphasizing the work they are doing that has been outsourced here. Boeing's design center in Moscow, which opened with a dozen or so engineers hired through a cooperative program with Ilyushin in 1998, employs more than 1,200 Russians today. About 300 Russian engineers designed parts of the Boeing 787.

Airbus and its parent company, EADS, have invested $600 million over 10 years, the Europeans said here Tuesday. The company employs around 100 engineers at a Moscow design center, according to its Web site. Airbus will ramp up cooperation with Russia to $110 million annually by 2007, it said.

Over the longer term, Airbus is in talks to involve Russian manufacturers more closely in its A350 wide-body passenger jet program, while tapping Russian engineering talent for future airplane designs. Airbus is also in talks to offer Russia a contract for converting older passenger jets into cargo carriers.

"These partnerships aim to generate a turnover of $25 billion for Russia over the life of the programs," the Airbus statement said. But analysts said Airbus had rolled its existing business together with potential future expansion over many decades to arrive at the $25 billion figure; an Airbus spokesman said the company was not announcing new Russian deals.

Such announcements have become common here, where Airbus and Boeing are seeking business, though the Airbus claim on Tuesday was considered unusual. Generally, a big order is accompanied by promises of job creation in the client country. Almost always, at least a few parts will be made there as well.

For now, most of the foreign aircraft flying in Russia are Boeings -- 74 of 97 Western jets in service. But Airbus has a larger order book. To increase sales, each company will be trying to get in on the ground floor with the new Russian aerospace holding.

Boeing intends to invest $3 billion in Russian design and manufacturing through 2011, a spokesman, Viktor Anoshkin, said Tuesday. Boeing had anticipated the Russian aerospace merger, which was initially disclosed last year, and has a strategy for cooperation, he said.

"I guess," Mr. Anoshkin added, "that very, very soon, Boeing executives will start talking about specific projects because everybody was waiting for the signing of this decree."

Ms. Sakhnova, the aircraft analyst, said that the makers of fighter jets, MIG and Sukhoi, would combine efforts already under way on a new-generation Russian fighter.

How will the merger help this project?

"Naturally, nobody knows. It's secret," she said.

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A version of this article appears in print on February 22, 2006, on Page C00001 of the National edition with the headline: Russian Aircraft Industry Seeks Revival Through Merger. Order Reprints|Today's Paper|Subscribe